- Dovish FOMC meeting boosts stocks
- U.S. unemployment claims are near 42-year low as employers continue to ignore financial market turmoil
- U.S. Q4 current account balance expected to narrow mildly but remain high
- Philadelphia Fed index expected to rise but stay in negative territory
- JOLTS report expected to fall back but remain high and indicate a large number of job openings in the U.S. economy
- 10-year TIPS auction to yield near 0.33%
Dovish FOMC meeting boosts stocks — The FOMC at the conclusion of its 2-day meeting on Wednesday simply confirmed what the markets already knew about slow U.S. economic growth and overseas risks, but the stock market nevertheless welcomed the FOMC’s more dovish stance. The Fed’s dot plot reflected a change to expectations for only two rate hikes in 2016 rather than the four rate hikes that members were expecting as of December. The FOMC in its post-meeting statement acknowledged overseas risks by saying that “global economic and financial developments continue to pose risks.” The FOMC also kept its balance of risk assessment essentially suspended while it awaits further developments. The FOMC reduced its GDP forecasts to +2.2% from +2.4% for 2016 and to +2.1% from +2.2% for 2017.
The FOMC’s view is still substantially more hawkish than the market’s view considering that the federal funds futures market is fully discounting only one rate hike this year by December’s FOMC meeting rather than the Fed’s two rate hikes. The federal funds futures curve as a result of yesterday’s FOMC meeting results fell by -9 bp to 0.59% for the Dec 2016 contract, -9 bp to 0.89% for the Dec 2017 contract, and -8 bp to 1.16% for the Dec 2018 contract.
U.S. unemployment claims are near 42-year low as employers continue to ignore financial market turmoil — Last week’s -18,000 decline in initial unemployment claims left the series just +4,000 above the 42-year low of 255,000 posted in July 2015. The market consensus is for today’s report to show a +9,000 increase to 268,000, but any drop of more than -4,000 would leave the series at a new 42-year low, thus producing some positive media headlines for investors and consumers. U.S. layoffs remain at very low levels, illustrating that the turmoil seen since the beginning of the year has not spooked businesses into laying off workers. Meanwhile, today’s continuing claims report is expected to show an increase of +10,000 to 2.235 million, reversing about a third of last week’s -32,000 decline to 2.225 million. The continuing claims series is only +79,000 above its 15-year low of 2.146 million posted in Oct 2015.
U.S. Q4 current account balance expected to narrow mildly but remain high — Today’s Q4 U.S. current account deficit is expected to narrow mildly to -$118.0 billion from -$124.1 billion in Q3, but remain well above the 8-quarter moving average of -$103.1 billion. The U.S. current account deficit has recently seen upward pressure from weak exports due to the strong dollar and weak overseas economic growth. As a percentage of GDP, the U.S. current account deficit widened to 2.75% of GDP in Q3 from as low as 1.93% in Q4-2013, which indicates that the U.S. is failing to outgrow its current account deficit. The persistently large U.S. current account deficit continues to be an underlying long-term bearish factor for the dollar since about a net $1.4 billion worth of dollars are flowing out of the U.S. every calendar day, most of which end up being sold into the global forex markets.
Philadelphia Fed index expected to rise but stay in negative territory — The markets are expecting today’s March Philadelphia Fed business outlook index to show a +1.3 point increase to -1.5, adding to Feb’s +0.7 increase to -2.8. Despite the expected increase, the Philadelphia index is expected to remain in negative territory for the seventh consecutive month. Regarding the regional business confidence data released so far for March, the March Empire manufacturing index rose sharply by +17.26 points to 0.62, moving back into positive territory after spending the previous seven months in negative territory.
JOLTS report expected to fall back but remain high and indicate a large number of job openings in the U.S. economy — The market is expecting today’s Jan JOLTS job openings report to show a -57,000 decline to 5.550 million, falling back after the +261,000 surge to 5.607 million seen in December. The JOLTS series in December was only -61,000 below the record high of 5.686 million posted in July 2015. The high level of job openings is a leading indicator for higher payrolls since many of those jobs openings should translate into actual new jobs.
LEI expected to snap 2-month losing streak — The market is expecting today’s Feb leading indicators index to show a +0.2% increase, thus reversing Jan’s -0.2% decline. The LEI has recently been losing ground, falling by a combined -0.5% in Dec-Jan and falling to a 2-3/4 year low of +2.2% y/y in January. The Dec-Jan weakness in the LEI is a negative signal for GDP growth in Q1. The markets had been expecting U.S. GDP growth to improve to +2.0% in Q1 from Q4’s poor +1.0% rate. However, Q1 estimates were revised lower after this week’s disappointing retail sales report of -0.1% for Feb and the downward revision to -0.4% for Jan.
10-year TIPS auction to yield near 0.33% — The Treasury today will sell $11 billion of 10-year TIPS in the first reopening of Jan’s 5/8% 10-year TIPS note of Jan 2026. The $11 billion size of today’s auction is down by $2 billion from the $13 billion reopening-sizes previously seen since 2011 as the Treasury pursues its strategy of reducing coupon sizes and boosting T-bill sizes. Today’s 10-year TIPS issue was trading at 0.33% in when-issued trading late yesterday afternoon. The 12-auction averages for the 10-year TIPS are as follows: 2.42 bid cover ratio, $27 million in non-competitive bids to mostly retail investors, 6.3 bp tail to the median yield, 14.9 bp tail to the low yield, and 50% taken at the high yield. The 10-year TIPS is the most popular security among foreign investors and central banks. Indirect bidders, a proxy for foreign buying, have taken an average of 62.5% of the last twelve 10-year TIPS issues, well above the recent average of 55.4% for all recent Treasury coupon auctions.
